August 2010 Employment Report: The Private Sector Throws an Undersized Life Preserver

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The unemployment rate nudged higher in August for the first time in four months as weak hiring by private employers failed to keep pace with the decline in government workers and a large increase in the number of people looking for work. Firms added a net total 67,000 new jobs last month, down from July's upwardly revised total of 107,000 (originally 71,000); but with the departure of 114,000 Census workers, the economy lost 54,000 jobs -- the third consecutive monthly decline. The unemployment rate rose to 9.6 percent, after holding steady at 9.5 percent for three months, as discouraged workers came back into the labor force to hunt for jobs.

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As of August, the U.S. economy has lost 7.64 million (5.5 percent) of the jobs that existed at the peak of employment in December 2007.

The markets initially shrugged off the employment fallback, choosing instead to concentrate on the more positive news of private-sector job gains. "These are very nice numbers for the labor market," said Kathy Lien, a director of currency research at GFT in New York. "It means for the time being, some of the fears of weakness in the U.S. economy may be misplaced as the data shows the labor market is not as bad as feared."

Because the private sector continued hiring, "the double-dip talk was probably misplaced," said Maury Harris, chief economist at UBS Securities LLC in New York. However, "from a historical perspective, things are still soft. The economy ought to be doing better."

"There is less reason to be concerned about the trajectory of the economy in the very near term," concurred Louis Crandall, chief economist at Wrightson ICAP LLC in New Jersey, “but labor market trends remain weaker than the Fed is willing to tolerate in the long run. Continued stagnation will exhaust the Fed's patience at some point."

As we have indicated in the past, what the markets seem to be ignoring is that at least 100,000 jobs need to be created each month just to keep up with population growth. Since nonfarm employment bottomed out last December, job creation has averaged under 90,500 per month. Thus, the pace of hiring will have to increase dramatically to not only keep up with younge people entering the work force for the first time, but also to once again make those 7.64 million displaced workers productive.